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June 26 (The following statement was released by the rating agency)
Fitch Ratings has assigned Ryanair Limited's EUR850m seven-year senior unsecured notes a final rating of 'BBB+'. The final rating follows a review of the final terms and conditions conforming to information already received when Fitch assigned the expected rating on 2 June 2014.
The notes, which are guaranteed by Ryanair Holdings plc (RYA; BBB+/Stable), are part of Ryanair Limited's EUR3bn euro medium-term note programme. The proceeds of the notes will be used for general corporate purposes, including for funding Ryanair's upcoming aircraft deliveries, which will support its fleet expansion and help maintain a low average fleet age.
KEY RATING DRIVERS FOR THE SENIOR UNSECURED NOTES
The notes' rating is aligned with RYA's 'BBB+' Issuer Default Rating, despite potential subordination to RYA's existing EUR3.1bn of debt, which is mainly secured by the existing aircraft fleet. Factors supporting the alignment of the unsecured ratings with the IDR, as opposed to notching down, include the company's strong overall credit profile and the value of the enterprise relative to the outstanding debt.
In addition, for asset-intensive entities such as airlines rated 'BB-' and above, in some cases Fitch uses an unencumbered assets-to-unsecured debt test ratio of 2x as a threshold for notching down unsecured debt rating from the IDR. Currently, Fitch estimates RYA has a ratio of unencumbered assets-to- unsecured debt of around 2x. This primarily includes prospective unencumbered aircraft to be delivered over the next 12 months, and other group unencumbered assets (spare engines, etc.), excluding the fairly illiquid Aer Lingus stake. Meeting this core ratio supports Fitch's assignment of an unsecured rating at the same level as the 'BBB+' IDR. These calculations conservatively exclude the group's current EUR3.2bn of unrestricted cash and investments, as well as intangible assets such as slots and gates.
The alignment of the debt rating with the IDR is further supported by the potential residual market value in encumbered assets. Pre-paying the loans related to such partially encumbered assets would increase unencumbered assets. Fitch estimates that including the residual market value of aircraft whose loans have amortised down to a loan to value below 40% would drive the unencumbered assets-to-unsecured debt coverage ratio to nearly 4x.
Fitch notes that it is unusual for an investment-grade issuer to have a capital structure including such a high level of secured debt and encumbered assets. For RYA this occurred mainly due to the inexpensive financing available through Export-Import Bank of the United States (Ex-Im) guaranteed loans. As Ex-Im funding has become less cost-efficient for strong credits such as RYA, it is likely that future funding will lead to a substantial increase in unencumbered assets, further underpinning the alignment of the unsecured rating with RYA's 'BBB+' IDR.
The debt rating is sensitive to changes in RYA's IDR. In addition, should RYA be downgraded to 'BBB-' or lower, the likelihood of the unsecured debt being notched below RYA's IDR would increase if RYA maintains high levels of secured debt. However, the unencumbered asset test described above could still apply.
KEY RATING DRIVERS FOR RYA
RYA's low cost advantage and substantial liquidity are key drivers of its rating. The company's high margins, significant cash generation, and financial flexibility further differentiate RYA from most airline peers. RYA's solid capacity for meeting its financial commitments is also supported by the company's fairly flexible cost structure, low break-even load factor, and robust hedging programmes for fuel and currencies.
RYA has delivered strong financial results for the past three years despite a lacklustre demand environment and fairly high fuel costs, and Fitch expects the company's results to continue to remain strong while it begins taking delivery of new aircraft over the next five years. The company's low fleet age, fleet commonality and other elements of it business model also support the ratings. RYA's financial metrics are generally strong for the rating, with the exception of gross leverage, but this is offset by low net leverage metrics driven by the company's large cash position.
Overall, RYA's conservative and simplified business model tempers the impact of the financial leverage and operating leverage that are characteristic of the airline industry. The business model is designed not just to achieve industry-low costs but also to mitigate some of the key risks in the sector. The company's financial strength, including strong cash liquidity, is a key element of this low-cost/reduced-risk strategy. RYA's leading cost position, liquidity, high margins and significant cash generation give it the ability to withstand the inevitable shocks that periodically hit the airline industry, as well as fending off competitive threats.
Key rating risks include significant cash distributions to shareholders; some recent changes to parts of the business model, mainly in the areas of customer service and distribution; and yield weakness seen in its key markets for parts of the financial year ending March 2014. Ryanair's revenue profile is also more seasonal than most of the airlines in Fitch's portfolio. Competitive pressures are a persistent challenge, including expansion plans of various low-cost/hybrid airlines, such as Norwegian Air Shuttle ASA and Easyjet plc and a gradual unbundling trend at the legacy carriers.
The company's growth plan and related capital expenditures over the next five years is also an item to watch, as is potential longer-term exposure to fuel price levels and currency exchange rates. Larger changes to the company's business model, such as an expansion into the long-haul market (unless credit ring-fenced in a separate entity from RYA), could also be a rating risk. Other risks for the general airline industry are also concerns, including economic downturns, debt market conditions, fuel price shocks, war and terrorism, disease pandemics, and environmental factors such as volcano ash clouds.
Future developments that could lead to a negative rating action on RYA include:
- Adverse changes in RYA's liquidity strategy, unless cash is used to reduce debt, or in other financial and treasury policies
- EBITDAR margins consistently below 19%
- FFO fixed charge coverage consistently in the 4.5x-5.0x range or lower
- FFO net adjusted leverage consistently above 1.0x
- Long-haul expansion, unless housed in a credit separate from RYA
- Revisions to the company's M&A strategy
The IDR has limited upside potential because of the inherent risks in the airline industry and the company's shareholder distribution policies For full details on RYA's key rating drivers and rating sensitivities, see 'Fitch Rates Ryanair Holdings Plc BBB+; Outlook Stable' on www.fitchratings.com.